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How to use bootstrapping to finance your start-up

5 min read

When you set up a start-up, you have a lot of tasks to do. In addition to choosing the right legal form and implementing a good business idea, it is important to set up solid financing. One possibility is bootstrapping. Here, the company is founded without borrowing capital.

What does bootstrapping mean?

Bootstrapping is a financing method for companies that does not involve taking out a loan or other means of raising outside capital. This alternative to corporate financing is used in particular by start-ups.

Although bootstrapping has the advantage of not incurring any borrowing costs, founders should not underestimate the risk involved. Therefore, it is crucial to carefully plan the entrepreneurial activities and related expenses.

If your start-up achieves economic success in the coming years, external investors will also become aware of your business idea. Potential financiers include not only banks, but also business angels and venture capital investors.

Where does the capital come from in bootstrapping?

´With bootstrapping you finance the founding of your start-up exclusively from your own funds. Your equity comes from B. from these sources:

  • Reserves from own funds
  • Loans from the private sector
  • Leasing instead of buying
  • supplier credit

Reserves from own funds

To fund the start of your business, bring in your own funds. These consist z. B. from the balance in a savings account or assets from an inheritance.

Loans from the private sector

If friends, relatives or family members contribute financially to your business idea, agree on a private loan agreement. With regard to the amount of interest and the conditions for the repayment, you and the contractual partner can make more favorable agreements.

Leasing instead of buying

Choosing to lease rather than buy means you’re purchasing needed items through leasing. This offers you the advantage that the monthly leasing installments usually represent a lower financial burden than the entire purchase price. In addition, you can claim the leasing installments as tax-deductible operating expenses, which brings additional financial advantages.

Supplier credit

A supplier loan offers financial support from suppliers for start-ups. This can mean, for example, that invoices can be paid at a later date or that installment payments can be agreed to ensure the company’s liquidity.

A good financial basis for founding a start-up results from the combination of different equity funds.

As an example: Two computer scientists have developed an app that helps users trade cryptocurrencies. They set up a start-up to market their business idea. Initial funding is provided by the founders’ savings, a personal loan from a fellow investor, and the use of ‘leasing rather than buying’ as a financing option.

How bootstrapping works

With bootstrapping, your company finances itself from its own resources instead of resorting to a large amount of credit. As a rule, these do not offer the same scope as a bank or a financially strong investor.

Since the financial support is limited, founders of start-ups are faced with the task of marketing their business idea quickly while maintaining the principle of economy. The available capital should only be used for necessary investments.

Ideally, these investments pay for themselves so quickly that a positive cash flow is generated in a short time. If your start-up can make a profit from this, it can be used directly to finance further investments. In this way, your company increases its market growth and becomes attractive to external financiers.

The prerequisites for successful bootstrapping

If you want to successfully support your start-up with bootstrapping, you should meet the following requirements:

  • Sufficient funds of your own
  • A constant willingness to take risks
  • A high degree of initiative

Sufficient funds of your own

Bootstrapping will not work without a base of own funds. In addition to family members and friends, also consider whether you can come along public federal funds or your state can be supported.

A constant willingness to take risks

There is always a risk with bootstrapping as there may not be enough financial resources available for essential investments.

A high degree of initiative

For you, bootstrapping also means that you do a large part of the work yourself. You waive e.g. B. on staff, because this is associated with an additional cost factor.

Bootstrapping for start-ups: What are the advantages and disadvantages?

Bootstrapping has the following advantages and disadvantages for you:

Advantages

  • You act independently of external investors and do not have to factor in any borrowing costs.
  • You will learn how to use the available money efficiently and sparingly.
  • In order to finance your start-up, it is not necessary for you to hand over capital shares to an external investor.
  • The independent start into the company existence strengthens your self-confidence. This helps you to assert yourself against your competitors in the market.

Disadvantages

  • Bootstrapping means a high degree of initiative and an above-average amount of work.
  • The private standard of living must be adapted to the financial situation.
  • Sensible management is one of your highest maxims.
  • If a private source of financing dries up, the further development of your start-up can come to a standstill.

How to successfully implement bootstrapping in a company

Bootstrapping as the first form of financing of a start-up can be successful if founders follow a few important principles. The personal life situation plays a decisive role in this. If you don’t have family responsibilities, you’re usually more risk-averse than someone with a family to support.

Another key factor is the ability to deal with daily stress. The best way to do this is to focus on your core competencies and keep a close eye on your spending. It is also helpful to create a solid business plan before taking your first entrepreneurial steps.

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All content in this article is for informational purposes only and in no way serves as investment advice. Investing in cryptocurrencies, commodities and stocks is very risky and can lead to capital losses.